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Chapter 9

ACCOUNTING FOR
RECEIVABLES

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
Copyright2011byTheMcGrawHillCompanies,Inc.Allrightsreserved.

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ACCOUNTS RECEIVABLE
A receivable is an amount due from another party.
This graph shows recent
dollar amounts of
receivables and their percent
of total assets for four wellknown companies.

A company must also maintain a separate account for


each customer that tracks how much that customer
purchases, has already paid, and still owes.

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SALES ON CREDIT
On July 1, TechCom had a credit sale of $950 to
CompStore and a collection of $720 from RDA
Electronics from a prior credit sale.

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SALES ON CREDIT

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CREDIT CARD SALES


Advantages of allowing customers to use
credit cards:
Customers
Customers
credit
credit is
is
Sales
Sales increase
increase by
by
evaluated
evaluated
providing
providing purchase
purchase
by
by the
the
options
options to
to the
the
credit
credit card
card
customer.
customer.
issuer.
issuer.
The
The risks
risks of
of extending
extending
credit
credit are
are transferred
transferred
Cash
Cash
to
the
credit
card
to the credit card
collections
are
collections
are
issuer.
issuer.
quicker.
quicker.

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CREDIT CARD SALES


On July 15th, TechCom has $100 of credit card
sales with a 4% fee, and its $96 cash is
received immediately on deposit.

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CREDIT CARD SALES


If instead TechCom must remit electronically the credit card
sales receipts to the credit card company and wait for the $96
cash payment, we will make the first entry on July 15, and the
second entry on July 20, when the cash is received.

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INSTALLMENT ACCOUNTS
RECEIVABLE
Amounts owed by customers from credit
sales for which payment is required in
periodic amounts over an extended time
period. The customer is usually charged
interest.
Ford Motor Company reports
more than $75 billion in
installment receivables.

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VALUING ACCOUNTS RECEIVABLE


Some customers may not pay their account.
Uncollectible amounts are referred to as bad debts.

There are two methods of


accounting for bad debts:
Direct Write-Off
Method
Allowance Method

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DIRECT WRITE-OFF METHOD


TechCom determines on January 23 that it cannot
collect $520 owed to it by its customer J. Kent.

Notice that the specific customer is noted in the


transaction so we can make the proper entry in the
customers Accounts Receivable subsidiary ledger.

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DIRECT WRITE-OFF METHOD


RECOVERING A BAD DEBT
On March 11, J. Kent was able to make full payment to
TechCom for the amount previously written-off.

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MATCHING VS. MATERIALITY


The matching
(expense recognition)
principle requires
expenses to be
reported in the same
accounting period as
the sales they helped
produce.

Materiality states that


an amount can be
ignored if its effect on
the financial
statements is
unimportant to users
business decisions.

The direct write-off method usually does not best


match sales and expenses.

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ALLOWANCE METHOD
At the end of each period, estimate total bad
debts expected to be realized from that periods
sales.
1.
2.

Two advantages to the allowance method:


It records estimated bad debts expense in the period
when the related sales are recorded.
It reports accounts receivable on the balance sheet
at the estimated amount of cash to be collected.

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RECORDING BAD DEBTS EXPENSE


TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.

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BALANCE SHEET PRESENTATION


TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.

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WRITING OFF A BAD DEBT


TechCom decides that J. Kents $520 account is
uncollectible.

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WRITING OFF A BAD DEBT


The write-off does not affect the realizable
value of accounts receivable.

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RECOVERING A BAD DEBT


To help restore credit standing, a customer sometimes
volunteers to pay all or part of the amount owed on an
account even after it has been written off.

On March 11, Kent pays in full his $520 account


previously written off.

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ESTIMATING BAD DEBTS EXPENSE

Accounts
Accounts Receivable
Receivable Methods
Methods

Percent
Percent of
of Accounts
Accounts Receivable
Receivable
Aging
Aging of
of Accounts
Accounts Receivable
Receivable

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PERCENT OF RECEIVABLES METHOD


1. Compute the estimate of the Allowance
for Doubtful Accounts.
2. Bad Debts Expense is computed as:
Total Estimated Bad Debts Expense
Previous Balance in Allowance Account
= Current Bad Debts Expense

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PERCENT OF RECEIVABLES METHOD


Musicland has $50,000 in accounts receivable and a $200 credit
balance in Allowance for Doubtful Accounts on December 31, 2011. Past
experience suggests that 5% of receivables are uncollectible.
Desired balance in Allowance for
Doubtful Accounts.

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AGING OF RECEIVABLES METHOD


Classify
Classifyeach
eachreceivable
receivableby
byhow
how
long
longititis
ispast
pastdue.
due.

Each
Eachage
agegroup
groupis
ismultiplied
multiplied by
byits
its
estimated
estimatedbad
baddebts
debtspercentage.
percentage.

Estimated
Estimatedbad
baddebts
debtsfor
foreach
eachgroup
group
are
aretotaled.
totaled.

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AGING OF ACCOUNTS RECEIVABLE

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AGING OF ACCOUNTS RECEIVABLE


Musicland
Musicland has
has an
an unadjusted
unadjusted
credit
credit balance
balance in
in the
the allowance
allowance
account
account is
is $200.
$200.
We
We estimated
estimated the
the proper
proper
balance
balance to
to be
be $2,270.
$2,270.

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SUMMARY OF METHODS

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NOTES RECEIVABLE

A promissory note is a written promise to pay a specified


amount of money, usually with interest, either on
demand or at a definite future date.

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COMPUTING MATURITY AND


INTEREST
The maturity date of a note is the day the note
(principal and interest) must be repaid.
On July 10, 2011, TechCom received a $1,000, 90-day,
12% promissory note as a result of a sale to Julia Browne.

The note is due and payable on October 8, 2011.

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INTEREST COMPUTATION

Even
Even for
for
maturities
maturities less
less
than
than one
one year,
year,
the
the rate
rate is
is
annualized.
annualized.

IfIf the
the note
note is
is
expressed
expressed in
in
days,
days, base
base aa
year
year on
on 360
360
days.
days.

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RECOGNIZING NOTES RECEIVABLE


Notes receivable are usually recorded in a single Notes
Receivable account to simplify recordkeeping. The original notes
are kept on file, including information on the maker, rate of
interest, and due date.
To illustrate the recording for the receipt of a note, we use the
$1,000, 90-day, 12% promissory note from Julia Browne to
TechCom. TechCom received this note at the time of a
product sale to Julia Browne.

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RECORDING AN HONORED NOTE


The principal and interest of a note
are due on its maturity date.
J. Cook has a $600, 15%, 60-day note receivable
due to TechCom on December 4.

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RECORDING A DISHONORED NOTE


The act of dishonoring a note does not relieve
the maker of the obligation to repay the
principal and interest due.
TechCom holds an $800, 12%, 60-day note of Greg Hart.
At maturity, October 14, Hart dishonors the note.

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RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS
On December 16, TechCom accepts a $3,000, 60-day,
12% note from a customer in granting an extension
on a past-due account. When TechComs accounting
period ends on December 31, $15 of interest has
accrued on the note.

$3,000 x 12% x 15/360 = $15

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RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS

Recording collection on note at maturity.

$3,000 x 12% x 60/360 = $60

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DISPOSAL OF RECEIVABLES
Companies can convert receivables to
cash before they are due.

Selling
Receivables

Pledging
Receivables

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ACCOUNTS RECEIVABLE TURNOVER


This ratio provides useful information for evaluating how
efficient management has been in granting credit to
produce revenue.
Net sales
Average accounts receivable, net

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END OF CHAPTER 9